product differentiation, store differentiation, and...
TRANSCRIPT
Product Differentiation,
Store Differentiation, and
Assortment Depth
Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
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1. Introduction
Purpose - How the equilibrium depth of the
product assortment is determined across categories
that vary in the degree of differentiation and
across retail environments that vary in the degree
of store differentiation.
Product Differentiation
Store Differentiation
Assortment
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
1. Introduction
Product Differentiation
Distinguish a product to make it more attractive to
a particular target market
Differentiate from competitors’ products
Three types of product differentiation
1. Simple
2. Horizontal
3. Vertical
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
1. Introduction
Store Differentiation
Distinguish a store to make it more attractive
Differentiate from competitors’ stores
Differentiated by
Product price
Proximity to consumer
The number of products
Store interior, etc
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
1. Introduction
Assortment
Width - Number of different lines offered
Depth - Number of items in line
Product line
A group of closely related products
Product item
Identified by a different brand name, number,
price, size, color, or one of many other attribute
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
1. Introduction
Assortment
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
2. Assortment depth and category sales
Degree of differentiation
Positive relationship in highly differentiation
Negative relationship in less differentiation
Retail margin
More differentiated, wider retail margins
Category sales rise with assortment depth
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Telecom Service/Policy
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2. Assortment depth and category sales
Cannibalization
New variants cannibalize a portion of their sales
from existing variants
More costly when retail margins are wider
More differentiated, larger impact on category
demand
Profit per variant falls with assortment depth
This effects dominates, retailers increase product
differentiation by reducing assortment depth
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
3. Assortment depth
and Product differentiation
Inverted U-shaped pattern
Survival rate of category demand
Reduction in profit per variants
As profit per variant declines, introducing new
variants ceases to be worthwhile9
Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
Survival
rate
Reduction
…… (1)
3. Assortment depth
and Product differentiation
Dashed line : survival rate
Solid line : profit per variant
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
A model of store differentiation
N retailers located on a circle of unit length
Consumers are distributed uniformly around the circle
No retail location is superior to any other location
Consumers compare only the assortment depths and
prices to decide where to shop
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
4. Assortment depth
and Store differentiation
The cost of switching between retailers increases
(i) Lower n
A smaller number of retailers in the market
Price ↑, assortment depth ↑
(ii) Higher t
The transaction cost of traveling to a rival
retailer becomes larger
Increase loyalty
Price ↑, assortment depth ↓
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
4. Assortment depth
and Store differentiation
Total retailer profit
Differentiation with respect to p
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Telecom Service/Policy
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Effect into an inter-
retailer margin
Effect into an intra-
retailer margin
4. Assortment depth
and Store differentiation
…… (2)
…… (3)
Effect of a price increase on
Inter-retailer margin
The role of prices in determining market share
Intra-retailer margin
The role of the prices in augmenting profit per
customer
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
4. Assortment depth
and Store differentiation
Opposing signs
A strengthening of effects on the intra-retailer
margin has similar implications for retail prices as
a weakening of effects on the inter-retailer margin
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
4. Assortment depth
and Store differentiation
…… (3)
An increase in consumer switching costs raises
retail prices by
(i) higher t
The development of greater consumer loyalty
Hard to attract customers from other retailers
Hard to do selective discount
→ Price increase
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
4. Assortment depth
and Store differentiation
An increase in consumer switching costs raises
retail prices by
(ii) lower n
The closure of existing retailers
More customers are allocated
Strengthen monopoly pricing incentive
→ Price increase
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Telecom Service/Policy
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4. Assortment depth
and Store differentiation
Differentiation with respect to v
Inter-retailer
Assortment depth ↑, attracts new customers
Intra-retailer
Assortment depth ↑, raises retail profit per customer
Positive effects on both terms.
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Telecom Service/Policy
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4. Assortment depth
and Store differentiation
Effect into an inter-
retailer margin
Effect into an intra-
retailer margin
…… (4)
Equilibrium price, equilibrium assortment depth
→ Determined by the simultaneous solution of
equation (3) , (4)
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Telecom Service/Policy
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4. Assortment depth
and Store differentiation
Elasticity with respect to assortment depth( )
Degree to which new variants cannibalize their
demand from the demand for existing variants as
the assortment deepens.
→ demand is independent of assortment depth.
→ total category demand remains constant.
θ = degree of product differentiation
θ ↓, differentiation ↑
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Telecom Service/Policy
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5. Store and Product Differentiation
As θ ↓, ↓
Then differentiation ↑, profit level ↑ ?
→ No
Category profitability depends on the opportunity
cost of cannibalization, not on the level.
Cannibalizing sales from existing variants is more
costly when retail margins are wide.
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Telecom Service/Policy
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5. Store and Product Differentiation
The Monopoly Outcome
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Since increases with θ
Equilibrium price ↑, Differentiation level ↑
Equilibrium price ↓, Differentiation level ↓
5. Store and Product Differentiation
…… (5)
The Monopoly Outcome
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Telecom Service/Policy
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As assortment depth ↑,
Profit of from new variants ↑
Cannibalizes in profit from
existing variants
5. Store and Product Differentiation
…… (6)
As retail margins widen and the level of sales per variant falls, cannibalization becomes increasingly costly, and the equilibrium depth of the product assortment ultimately becomes shallower.
Ex) General Motors
Too many types of cars
→ weak sales, cost inefficiencies
“Deproliferation” strategy to reduce the number of car models in 1987
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
5. Store and Product Differentiation
Oligopoly Outcome
Opposing signs
Discount on category price from the monopoly level
to acquire market share
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5. Store and Product Differentiation
…… (7)
Effect into an inter-
retailer margin
Effect into an intra-
retailer margin
Oligopoly Outcome
Positive effect on both terms
Attracts store traffic
Facilitates greater category demand per customer
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Telecom Service/Policy
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5. Store and Product Differentiation
…… (8)
Effect into an intra-
retailer margin
Effect into an inter-
retailer margin
t ↑, assortment depth ↓
1/n ↑, assortment depth ↑
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Telecom Service/Policy
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5. Store and Product Differentiation
6. The direction of future research
The degree of product differentiation in the category
might depend on both the volume of sales per
variant and the number of variants
Consider manufacturer decisions to add variants to
their product lines
Consider the returns to jointly expanding assortment
width and assortment depth
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Telecom Service/Policy
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7. Summary
Assortment depth
Degree of differentiation
Positive / negative relationship
Cannibalization
Product differentiation
Inverted U-shaped pattern
Store differentiation
Inter-retailer margin / Intra-retailer margin /
Switching cost
Monopoly/Oligopoly outcome
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee
References
정두근, “최적 구색 갖추기”
Lynch, Ross, Wray - “Introduction to marketing”
Evans Berman - “Marketing 4”
Michael Spence - “product differentiation and welfare”
Xavier Vives - “Oligopoly Pricing”
Steven C. Salop - “Monopolistic competition with
outside goods”
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Telecom Service/Policy
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Appendix
is utility function
```````````````````````````````` ,
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Telecom Service/Policy
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t is distance between
consumer and retailer
n is the number of retailers
p is a price of first retailer
v is the number of products of
first retailer
is a price of second retailer
is the number of products of
second retailer
Appendix
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Telecom Service/Policy
Yong-dae, An & Sun-hee, Lee